Reblog: The Benefits Of Productive Worrying – yes worrying can be good for you!!

Seth Klarman is one of the world’s most respected value investors, and when he speaks, it always pays to listen. Unfortunately, Klarman is relatively media-shy, his interviews over the years have been few and far between. You have to dig to find all of his prior media coverage.

This month’s copy of Value Investor Insight magazine pulls some Klarman wisdom out of the archives. The wisdom is taken from the pages of the value fund manager’s 2004 letter to investors of his industry-leading hedge fund, Baupost. Titled “productive worrying,” Klarman talks about one of the key traits every successful investor has and how the average investor can better their investing process by looking to the long-term and worry about the things that matter not the issues they have no influence over.

“Most professional investors face significant pressure to generate returns in the near-term. They believe their clients demand it. Their internal incentives encourage it. Their psyches need it. Few investors are comfortable taking a truly long-term point of view, no matter how compelling the opportunity, because their results are measured in the very short-run. While others attempt to win every lap around the track, it is crucial to remember that to succeed at investing, you have to be around at the finish. What matters is not who performs best during sequential short-term intervals, but the attainment of a successful long-term, risk-adjusted, cumulative result. Oddly, risk moves to the forefront of investor consciousness only when things are already going badly. Losing money is perhaps the only thing that makes most investors worry about losing money. With so much pressure for competitive short-term performance, worrying about what can go wrong may seem like a luxury. Ironically, when almost no one is focused on the downside, even a minor increase in investor perception of risk can trigger dramatic market declines.”

The letter continues:

“While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost. Concerned that it might rain? Pack a raincoat and umbrella. Worried you will be late? Leave earlier than originally planned.”

“Successful investing goes hand in hand with productive worrying. Worried that a stock you hold might fall sharply? Reduce your holdings or buy some puts. Concerned that interest rates may rise or the dollar fall? Establish an appropriate hedge. Worried that the stock you bought on a tip might be a bad idea? Sell it and move on. Worry enough during the day and you can, in fact, sleep justifiably well at night.”

And finally, Klarman sums up how “productive worrying” can help you achieve the most important goal of all: capital preservation:

“Have we been too optimistic in our assumptions? Have we blindly ignored new information because we are clinging too tightly to our original thesis? Have we held onto an investment because it keeps going up, irrationally ignoring that it has become overvalued? Without a healthy dose of reflective worry, we are unlikely even to identify our lapses in judgment, let alone correct them. In other words, only by actively, productively, relentlessly worrying about what can go wrong can we maximize the odds that things will go right, by doing everything within our control to perfect our decision-making. You rarely, if ever, make money from worrying; it does not typically enhance return. But by avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of successful investing”

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